What You Should Know About Bank of Commerce Holdings’s (NASDAQ:BOCH) Risks

Simply Wall St
February 21, 2019

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Improving credit quality as a result of post-GFC recovery has led to a strong environment for growth in the banking sector.
Bank of Commerce Holdings (NASDAQ:BOCH) is a small-cap bank with a market capitalisation of US$190m. Its profit and value are directly impacted by its borrowers’ ability to pay which is driven by the level of economic growth. This is because growth determines the stability of a borrower’s salary as well as the level of interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Bank of Commerce Holdings’s bottom line.
Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.

Does Bank of Commerce Holdings Understand Its Own Risks?

The ability for Bank of Commerce Holdings to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on.
If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then the bank may be relatively accurate and prudent in its bad debt provisioning.
With a non-performing loan allowance to non-performing loan ratio of 296.48%, the bank has extremely over-provisioned by 196.48% compared to the industry-average. We wonder if this might indicate the bank is expecting to incur further non-performing loans in the near future.

What Is An Appropriate Level Of Risk?

Bank of Commerce Holdings may be taking on too many risky loans if it is over-exposed to bad debt.
Ideally, loans that are “bad” and cannot be recuperated by the bank should comprise less than 3% of its total loans.
When these loans are not repaid, they are written off as expenses which come directly out of the bank’s profit.
Since bad loans only make up an insignificant 0.44% of its total assets, the bank may have very strict risk management – or perhaps the risks in its portfolio have not eventuated yet.

Is There Enough Safe Form Of Borrowing?

Bank of Commerce Holdings profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available.
Generally, the higher level of deposits a bank retains, the less risky it is deemed to be.
Bank of Commerce Holdings’s total deposit level of 97% of its total liabilities is very high and is well-above the sensible level of 50% for financial institutions. This may mean the bank is too cautious with its level of its safer form of borrowing and has plenty of headroom to take on risker forms of liability.

Next Steps:

How will BOCH’s recent acquisition impact the business going forward? Should you be concerned about the future of BOCH and the sustainability of its financial health?
Below, I’ve listed three fundamental areas on Simply Wall St’s dashboard for a quick visualization on current trends for BOCH. I’ve also used this site as a source of data for my article.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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